FOREX-Euro rally stalls, dollar tumbles vs yen

Published 10/07/2010, 03:07 PM
Updated 10/07/2010, 03:12 PM
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* Euro climbs above $1.40 but then surrenders gains

* Dollar hits 15-yr low vs yen

* Dollar/yen below Sept 15 intervention level

* Aussie dollar surges to 27-yr high, closer to parity (Adds details, updates prices)

By Steven C. Johnson

NEW YORK, Oct 7 (Reuters) - The euro fell against the dollar on Thursday as investors booked profits on its recent rise ahead of U.S. jobs data while the dollar fell to a 15-year low against the yen.

Investors are bracing for the Federal Reserve to start pumping more money into the U.S. economy next month to boost growth.

Those expectations have driven the euro up 6 percent since August and also pushed the greenback to a record low against the Swiss franc.

The euro's rise above $1.40 in early New York trade, a level not breached since January, prompted a round of profit-taking, particularly ahead of U.S. jobs data due on Friday.

"The euro has run up so quickly, and once we broke the $1.40 handle, we ran out of buyers," said Boris Schlossberg, head of research at GFT Forex. "People are getting cautious and taking profits."

Technical indicators, however, showed the euro remained firmly in an uptrend, and BNP Paribas technical strategist Andrew Chaveriat said it would take a solid break below $1.38 and probably a subsequent test of $1.3635 to signal a significant correction.

The euro last traded at $1.3908, down 0.2 percent. Earlier it hit $1.4030 on EBS.

The dollar fell 0.6 percent to 82.38 yen , near a 15-year low of 82.11 yen. Traders said there were options barriers around 82 yen.

The dollar's decline below 82.87 yen, the level where Tokyo intervened for the first time in six years on Sept. 15, increased market anxiety.

Currency intervention and talk of monetary policy loosening by central banks has ignited the issue of global economic imbalances ahead of an International Monetary Fund meeting this weekend, where the threat of a "currency war" is likely to dominate discussion.

But Maurice Pomery, managing director of Strategic Alpha in London, said the meeting was unlikely to produce agreement on trade imbalances as countries would keep acting independently to boost growth.

SENSE OF URGENCY

Between March 2009, when the Fed announced its first round of quantitative easing, and November 2009, the euro rallied 16 percent against the dollar.

But strategists said much of the effect of a suspected second round is already in the dollar's price now.

What's more, Schlossberg said a better-than-expected employment report on Friday -- economists expect the data to show a 75,000 private sector job gain but no change to overall employment -- could trigger a significant euro correction.

"The market has already priced in a $1 trillion expansion of the Fed balance sheet, and labor market data is pivotal," he said. He said a "positive print" could spark a euro correction and ease some concern about how aggressive the Fed might be.

Speculators ramped up bets in favor of the euro in the latest week, Commodity Futures Trading Commission data showed, and opened the biggest short dollar position since 2008 [IMM/FX].

But Chaveriat said any euro pullback to the $1.35-$1.36 area over the coming weeks would probably be just a brief interlude between euro rallies.

Traders reported good demand for one-month $1.4150 strikes, and Chaveriat said the demand that has driven the euro, commodity currencies such as the Australian dollar and gold higher in recent months is not about to evaporate.

"There's a sense of urgency because the market has been very choppy for the first three quarters and a lot of hedge funds and trend traders are behind their benchmarks," he said.

"That's why I'm skeptical we've seen the last of the euro's run-up. I think there are enough medium-term players who need to make money before the year ends."

That translates to more euro gains in late October and November, which could target $1.4375, the 76.4 percent retracement of the euro's November-to-June decline.

The Australian dollar, another favored currency in recent months, surged to a 27-year high above $0.99 after surprisingly strong Australian jobs data revived talk of an interest rate hike. It was last at $0.9817, up 0.5 percent .

Sterling rose to $1.6019 after the Bank of England kept interest rates on hold, though profit-taking pushed it back to $1.5861 by afternoon. Traders said it would have to fall solidly through $1.58 to enter a downtrend.

The dollar fell to an 8 1/2-month low against a basket of currencies <.DXY> and an all-time low against the Swiss franc of $0.9555 on trading platform EBS. .^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For more on currency wars, click on http://r.reuters.com/dyw27p ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ (Additional reporting by Nick Olivari and Gertrude Chavez-Dreyfuss in New York and Neal Armstrong in London; Editing by Dan Grebler)

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